EUR 850.00 For Business Accounts Only

Morningstar | Dropping Coverage of No-Moat Sohu

We are dropping coverage of no-moat Sohu. We maintain our view that the company will not be able to make a profit on a net basis until 2021, given the intense competition amid saturation of mobile users in China and the absence of a moat. In the third quarter, although Sohu’s key mobile apps gained daily active users (20% in September) and time spent, and its video paying user base is growing slowly, brand advertising revenue was down 24% year over year versus negative 29% in the second quarter. Sohu video continues to reduce content costs by developing lower-cost new original programs instead of purchasing expensive content; as such, the operating loss of the segment contracted 55% year over year to $27 million. However, we have previously flagged our concerns about Sohu video's new business model, as its ability to achieve continuous growth in its user base, subscriptions, and ad revenue based on original content is untested, and the competition is intense and is dominated by the three wide-moat Internet names Alibaba, Tencent, and Baidu. With the listing of Sogou, investors who are interested in investing in the search-related business can now gain exposure directly. Investors who want exposure to the gaming business can also invest directly in the listed shares of Changyou.